Payback Period and NPV:

Taxes and Straight-Line Depreciation

Assume that United Technologies is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 10,000 design hours per year; an operating cost savings of $40 per hour. The annual cash expenditures of operating the CAD system are estimated to be $200,000. The CAD system requires an initial investment of $500,000. The estimated life of this system is five years with no salvage value. The tax rate is 35 percent, and United Technologies uses straight-line depreciation for tax purposes. United Technologies has a cost of capital of 20 percent.

(a) Compute the annual after-tax cash flows related to the CAD project.

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(b) Compute each of the following for the project:

1. Payback period. (Round your answer to two decimal places.)

Answer

years

2. Net present value.(Round answer to the nearest whole number. Use a negative sign with your answer if appropriate.)

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